How to measure your ERP project ROI

While the needs and strategies of every company differ with respect to Enterprise Resource Planning, most organizations must complete justification for capital expenditure before committing to an Erp solution. This is the return on investment (ROI) process that identifies the project’s expected direct and indirect costs compared to the expected benefits. Projects of this magnitude are usually approved only if the return can be proven to meet the specific lender and board requirements.

It is important to complete the calculation for a reasonable life-cycle forecast of costs and benefits-including purchase, implementation, and on-going-from five to seven years. The following list of fields provides a solid starting point for your ROI calculations.

Costs: Purchase and Implementation

• Computer hardware, operating system, database software, networking equipment, and tools (be sure to include installation, start-up and testing costs for such items)
• Licensing, installation, configuration, and conversion of ERP software (including consulting and implementation assistance for these costs)
• Process development, testing, and documentation
• Training

(Note that up-front (capital) costs are reduced in Software-as-a-Service ( SaaS) implementations, but the ongoing (subscription and/or operating) costs will be there. However, the ROI analysis is valid with an appropriately adjusted expected life-cycle.)

Costs: On-going

• IT departmental staff, consultants, utilities and support costs
• Annual licensing and maintenance fees for software
• Training for new employees and continuing skills enhancement for existing employees
• Budget for future system expansion and customization

Direct Benefits: Cost Saving and Cost Avoidance

• Static inventory reduction, including materials, parts, finished good, and work-in-process items
• Increased manufacturing/Service throughput and general productivity
• Reduced quantities of scrap and waste materials (Manufacturing Industry)
• Reduce delays while maintaining the SLA (Service Industry)
• Less rework leading to decreases in expediting, overtime, and premium freight
• Fewer last-minute set-ups due to sudden, unforeseen schedule changes

Direct Benefits: Increased Revenue Opportunities

• Increased sales thanks to better-informed customer service personnel
• Shorter lead times and better on-time delivery leading to improved quality and enhanced customer satisfaction
• Margin improvements due to efficient distribution and a quicker time to market for new products
• Better Lead & Opportunity management which will give you a 360-degree view of your sales pipeline

Indirect Benefits (potential)

• Improved retention and higher productivity from employees who feel more effective and thus experience increased job satisfaction
• Less disruption and frustration in the distribution and manufacturing facilities when attempting to accommodate last-minute changes, enabling a more stable environment
• Increasingly strategic market actions (e.g. pricing decisions, campaigns, product/variant releases, inventory deployment) as a consequence of better insight into market conditions, customer needs, and competitor activity